What is CLV (Customer Lifetime Value)?
Your Customer Lifetime Value is the amount that each customer generates during their relationship with you. If your customers typically repurchase, then they will have a longer lifetime value than those that only make one purchase. For instance, subscription services will increase their CLV by ensuring that customers don’t cancel subscriptions. The more you sell to each customer, the higher your CLV.
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Marketing metrics are key to your ability to evaluate your marketing performance. Marketing strategies rely on the ability to test and learn. Measuring each marketing approach allows you to optimize your efforts for maximum return on investment.
Customer Lifetime Value is just one example of a key business metric. Others include CAC, ROAS, Conversion Rates, Cost Per Lead, and more.
Each metric provides you with a different piece of information to add to your overall understanding of your marketing performance. Your CLV tells you just how much each of your customers is worth to your business. It will also help you to identify whether you could optimize existing relationships more effectively.
But how do you calculate a customer’s lifetime value? And how much should you rely on it overall?
How to Calculate CLV
There are a few types of CLV that you can calculate, depending on what you’re looking to analyze. You can calculate customer lifetime value at the company level, per audience segment, or for each individual customer.
Begin by choosing a specific time frame. Often, a year is the easiest to calculate. You will need a few key pieces of data to continue calculating your CLV. These are:
Average purchase value: The total of all customer purchases in your chosen timeframe, divided by the number of purchases.
Average purchase frequency: Take the number of purchases in your specified timeframe, and divide that by the number of individual customers in that same period.
Customer value: This is the average purchase frequency (above) multiplied by the average purchase value (above).
Customer lifespan: The average length of time each customer remains with your business and continues making purchases. You can take this from across your customer base, or per segment.
Once you have each of these figures, you can put them into the formula. The formula for calculating CLV is:
Customer Lifetime Value = Customer Value x Customer Lifespan
Depending on your segment, this will give you an idea of how much each customer is worth company-wide, or specifically. Ultimately, the more a customer spends, or the longer they maintain the relationship with you, the higher their value.
The Importance of CLV
Now you know how to calculate your customer lifetime value, what do you do with that information? Why do you need to measure this metric? Your CLV can drive the optimization of your customer approach, and ensure they all receive the best experience with your business.
The primary goal of any business is to increase revenue. Needless to say, without valuable customers, a business cannot scale. The majority of salespeople and founders will drive to increase sales in order to grow. Therefore, many forget that each customer is an opportunity for reselling and extending the relationship.
The higher your CLV, the higher your revenue. Not to mention, existing customers are already loyal and familiar with your business. They are a great opportunity to generate further revenue with further sales.
Understanding your CLV will help to guide your retention efforts. As mentioned, so many salespeople will focus on increasing sales. Marketing can help to nurture relationships with existing customers, and keep them returning for future sales.
It’s important to note that this will be relatively dependent on your sales model. Subscription-style services will naturally be able to drive customer retention with great marketing and after-sales service. However, one-time purchase solutions might require a more concerted effort to improve CLV by retaining customers and encouraging them to return.
Calculating your CLV by segment can help you to understand the engagement of different audience groups. If one type of buyer persona is returning more frequently and making larger purchases than other groups, it’s important to ensure you’re consistently targeting that profitable group.
Similarly, if you’re struggling to see real returns from an audience segment, it might be worth restructuring your marketing to avoid wasting resources.
Pair With Your CAC
Your CLV should work alongside your Customer Acquisition Costs. This will tell you whether your customer acquisition budget is being spent wisely, or whether further optimization is required.
Ultimately, if your CAC is higher than your CLV, that isn’t a sustainable business model. You need to get the most revenue possible from each individual sale. With this information, you can then work on reducing your acquisition costs and optimizing your marketing, or improving your customer retention for increased revenue from each sale.
At Nituno, we work with B2B SaaS and tech companies to improve marketing strategies and measure results. Our test-and-learn approach is driven by marketing metrics. We believe it is critical to consistently monitor marketing performance, and make optimizations according to that data. Need help understanding your marketing performance? Get in touch with us today.